us internal revenue service: p587--2001

8/14/2019 US Internal Revenue Service: p587--2001

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Department of the TreasuryContentsInternal Revenue ServiceImportant Reminder . . . . . . . . . . . . . . . . . . . . . . . . 1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Publication 587Cat. No. 15154T

Qualifying for a Deduction . . . . . . . . . . . . . . . . . . . 2

Figuring the Deduction . . . . . . . . . . . . . . . . . . . . . . 6

Business UseDeducting Expenses . . . . . . . . . . . . . . . . . . . . . . . 7

Depreciating Your Home . . . . . . . . . . . . . . . . . . . . 9of Your HomeDay-Care Facility . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Sale or Exchange of Your Home . . . . . . . . . . . . . . 11(Including Use byBusiness Furniture and Equipment . . . . . . . . . . . . 13Day-Care Providers)Recordkeeping . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Where To Deduct . . . . . . . . . . . . . . . . . . . . . . . . . . 15For use in preparingSchedule C Example . . . . . . . . . . . . . . . . . . . . . . . 17

2001 Returns Worksheet To Figure the Deduction forBusiness Use of Your Home . . . . . . . . . . . . . . 22Instructions for the Worksheet . . . . . . . . . . . . . . . 23

How To Get Tax Help . . . . . . . . . . . . . . . . . . . . . . . 24

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Important Reminder

Photographs of missing children. The Internal Reve-

nue Service is a proud partner with the National Center forMissing and Exploited Children. Photographs of missingchildren selected by the Center may appear in this publica-tion on pages that would otherwise be blank. You can helpbring these children home by looking at the photographsand calling 1800THELOST (18008435678) ifyou recognize a child.

IntroductionThe purpose of this publication is to provide information onfiguring and claiming the deduction for business use of

your home. The term homeincludes a house, apartment,condominium, mobile home, or boat. It also includes struc-tures on the property, such as an unattached garage,studio, barn, or greenhouse. However, it does not includeany part of your property used exclusively as a hotel or inn.

This publication includes information on the following.

The requirements for qualifying to deduct expensesfor the business use of your home (including specialrules for storing inventory or product samples).

Types of expenses you can deduct.


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How to figure the deduction (including depreciation 4562 Depreciation and Amortizationof your home).

8829 Expenses for Business Use of Your Home Special rules for day-care providers.

See How To Get Tax Helpnear the end of this publica- Selling a home that was used partly for business. tion for information about getting publications and forms.

Deducting expenses for furniture and equipmentused in your business.

Qualifying for a Deduction Records you should keep.

To deduct expenses related to the business use of part ofWhere to deduct your expenses. your home, you must meet specific requirements. Even

If you are an employee, a partner, or you file Schedule F then, your deduction may be limited. Use this section and(Form 1040), use the worksheet and its instructions, near Figure A to decide if you can deduct expenses for thethe end of this publication, to help figure your deduction. If business use of your home.you file Schedule C (Form 1040), you must use Form To qualify to claim expenses for business use of your8829, Expenses for Business Use of Your Home. The home, you must meet the following tests.Schedule C Exampleshows how to report the deductionon Form 8829. 1) Your use of the business part of your home must be:

The rules in this publication apply to individuals, trusts,a) Exclusive (however, see Exceptions to Exclusiveestates, partnerships, and S corporations. They do not

Use, later),apply to corporations (other than S corporations). Thereare no special rules for the business use of a home by a b) Regular,partner or S corporation shareholder.

c) For your trade or business, ANDIf you need information on deductions for renting outyour property, see Publication 527, Residential Rental

2) The business part of your home must be oneof theProperty.following:

Comments and suggestions. We welcome your com-a) Your principal place of business (defined later),

ments about this publication and your suggestions forfuture editions. b) A place where you meet or deal with patients,

You can e-mail us while visiting our web site at clients, or customers in the normal course of yourwww.irs.gov. trade or business, or

You can write to us at the following address:c) A separate structure (not attached to your home)

you use in connection with your trade or busi-Internal Revenue Service

ness.Technical Publications BranchW:CAR:MP:FP:P1111 Constitution Ave. NW

Additional tests for employee use. If you are an em-Washington, DC 20224

ployee and you use a part of your home for business, youmay qualify for a deduction for its business use. You must

We respond to many letters by telephone. Therefore, it meet the tests discussed above plus:would be helpful if you would include your daytime phone

1) Your business use must be for the convenience ofnumber, including the area code, in your correspondence.your employer, and

Useful Items 2) You do notrent any part of your home to yourYou may want to see: employer and use the rented portion to perform ser-

vices as an employee.Publication

Whether the business use of your home is for 523 Selling Your Homeyour employers convenience depends on all the

551 Basis of Assets facts and circumstances. However, business useTIP

is not considered to be for your employers convenience 583 Starting a Business and Keeping Recordsmerely because it is appropriate and helpful.

946 How To Depreciate Property

Form (and Instructions) Exclusive Use 2106 Employee Business Expenses

To qualify under the exclusive use test, you must use aspecific area of your home onlyfor your trade or business. 2106-EZ Unreimbursed Employee Business

Expenses The area used for business can be a room or other sepa-

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rately identifiable space. The space does not need to be ness. If you use your home for a profit-seeking activity thatmarked off by a permanent partition. is not a trade or business, you cannot take a deduction for

its business use.You do notmeet the requirements of the exclusive usetest if you use the area in question both for business and

Example. You use part of your home exclusively andfor personal purposes.regularly to read financial periodicals and reports, clip bondcoupons, and carry out similar activities related to yourExample. You are an attorney and use a den in yourown investments. You do not make investments as ahome to write legal briefs and prepare clients tax returns.broker or dealer. Since your activities are not part of a tradeYour family also uses the den for recreation. Since the denor business, you cannot take a deduction for the businessis not used exclusively in your profession, you cannot

use of your home.claim a business deduction for its use.

Principal Place of BusinessExceptions to Exclusive UseYou can have more than one business location, including

You do not have to meet the exclusive use test if either ofyour home, for a single trade or business. To qualify to

the following applies.deduct the expenses for the business use of your homeunder the principal place of business test, your home must You use part of your home for the storage of inven-be your principal place of business for that trade or busi-tory or product samples (discussed next).ness. To determine your principal place of business, you

You use part of your home as a day-care facility,must consider all the facts and circumstances.

discussed later under Day-Care Facility.Your home office will qualify as your principal place of

business for deducting expenses for its use if you meet the

Storage of inventory or product samples. If you use following requirements.part of your home for the storage of inventory or product

You use it exclusively and regularly for administra-samples, you can claim expenses for the business use oftive or management activities of your trade or busi-your home without meeting the exclusive use test. How-ness.ever, you must meet all of the following tests.

You have no other fixed location where you conduct You sell products at wholesale or retail as your trade

substantial administrative or management activitiesor business.

of your trade or business. You keep the inventory or product samples in your

home for use in your trade or business. Alternatively, if you use your home exclusively and regu-larly for your business, but your home office does not

Your home is the only fixed location of your trade orqualify as your principal place of business based on the

business.previous rules, you determine your principal place of busi-

You use the storage space on a regular basis. ness based on the following factors. The space you use is an identifiably separate space 1) The relative importance of the activities performed at

suitable for storage. each location.

2) If the relative importance factor does not determineExample. Your home is the sole fixed location of your your principal place of business, you can also con-

business of selling mechanics tools at retail. You regularly sider the time spent at each location.use half of your basement for storage of inventory and

If, after considering your business locations, your homeproduct samples. You sometimes use the area for per-cannot be identified as your principal place of business,sonal purposes. The expenses for the storage space areyou cannot deduct home office expenses. However, seedeductible even though you do not use this part of yourthe later discussions under Place To Meet Patients, Cli-basement exclusively for business.ents, or Customersor Separate Structurefor other ways toqualify to deduct home office expenses.

Regular UseAdministrative or management activities. There are

To qualify under the regular use test, you must use amany activities that are administrative or managerial in

specific area of your home for business on a continuingnature. The following are a few examples.

basis. You do not meet the test if your business use of thearea is only occasional or incidental, even if you do not use Billing customers, clients, or patients.that area for any other purpose.

Keeping books and records.

Ordering supplies.Trade or Business Use Setting up appointments.

To qualify under the trade or business use test, you mustuse part of your home in connection with a trade or busi- Forwarding orders or writing reports.

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Figure A.

Start Here:

Is part of your home

used in connection with

a trade or business?

Are you an employee?

Do you work at home

for the convenience of

your employer?

Do you rent part of your

home used for business

to your employer?

Is it your principal place

of business?

Do you meet patients,

clients, or customers in

your home?

Is it a separate

structure?Deduction allowedNo deduction

Is the use regular

and exclusive?

No

Yes

Can You Deduct Business Use of the Home Expenses?*

Yes

Yes

No

No

No

Yes

No

No

Yes

No

No

Yes

Yes

Yes

* Do not use this chart if you use your home for the storage of inventory or product samples, or to operate a day-care facility. See Exceptions to Exclusive Use,earlier, and Day-Care Facility, later.

Administrative or management activities performed at You have suitable space to conduct administrative orother locations. The following activities performed by management activities outside your home, butyou or others will not disqualify your home office from choose to use your home office for those activitiesbeing your principal place of business. instead.

You have others conduct your administrative orExample 1. John is a self-employed plumber. Most ofmanagement activities at locations other than yourJohns time is spent at customers homes and officeshome. (For example, another company does yourinstalling and repairing plumbing. He has a small office inbilling from its place of business.)his home that he uses exclusively and regularly for the

You conduct administrative or management activities administrative or management activities of his business,at places that are not fixed locations of your busi-

such as phoning customers, ordering supplies, and keep-ness, such as in a car or a hotel room.

ing his books. You occasionally conduct minimal administrative or John does not do his own billing. He uses a local

management activities at a fixed location outside bookkeeping service to bill his customers.your home. Johns home office qualifies as his principal place of

business for deducting expenses for its use. He uses the You conduct substantial nonadministrative or non-home office for the administrative or managerial activitiesmanagement business activities at a fixed locationof his plumbing business and he has no other fixed locationoutside your home. (For example, you meet with orwhere he conducts these administrative or managerialprovide services to customers, clients, or patients at

a fixed location of the business outside your home.) activities. His choice to have his billing done by another

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company does not disqualify his home office from being his can deduct expenses (to the extent of the deduction limit,principal place of business. Because he meets all the explained later) for the business use of his home.qualifications, including principal place of business, he candeduct expenses (to the extent of the deduction limit, Example 4. Kathleen is employed as a teacher. She isexplained later) for the business use of his home. required to teach and meet with students at the school and

to grade papers and tests. The school provides her with aExample 2. Pamela is a self-employed sales representa-

small office where she can work on her lesson plans, gradetive for several different product lines. She has an office in

papers and tests, and meet with parents and students. Theher home that she uses exclusively and regularly to set up

school does not require her to work at home.appointments and write up orders and other reports for the

Kathleen prefers to use the office she has set up in her

companies whose products she sells. She occasionally home and does not use the one provided by the school.writes up orders and sets up appointments from her hotelShe uses this home office exclusively and regularly for theroom when she is away on business overnight.administrative duties of her teaching job.Pamelas business is selling products to customers at

Kathleen must meet the convenience-of-the-employervarious locations throughout her territory. To make thesetest, even if her home qualifies as her principal place ofsales, she regularly visits customers to explain the avail-business for deducting expenses for its use. Because herable products and take orders.employer provides her with an office and does not requirePamelas home office qualifies as her principal place ofher to work at home, she does not meet thebusiness for deducting expenses for its use. She conductsconvenience-of-the-employer test and cannot claim a de-administrative or management activities there and she hasduction for the business use of her home.no other fixed location where she conducts administrative

or management activities. The fact that she conducts someadministrative or management activities in her hotel room More Than One Trade or Business(not a fixed location) does not disqualify her home officefrom being her principal place of business. Because she Whether your home office is the principal place of businessmeets all the qualifications, including principal place of must be determined separately for each trade or businessbusiness, she can deduct expenses (to the extent of the activity. One home office may be the principal place ofdeduction limit, explained later) for the business use of her business for more than one activity. However, you will nothome. meet the exclusive use test for any activity unless each

activity conducted in that office meets all the tests for theExample 3. Paul is a self-employed anesthesiologist. Hebusiness use of the home deduction.spends the majority of his time administering anesthesia

and postoperative care in three local hospitals. One of theExample. Tracy White is employed as a teacher. Herhospitals provides him with a small shared office where he

principal place of work is the school. She also has a mailcould conduct administrative or management activities.order jewelry business. All her work in the jewelry businessPaul does not use the office the hospital provides. Heis done in her home office and the office is used exclusivelyuses a room in his home that he has converted to an office.for that business. If she meets all the other tests, she can

He uses this room exclusively and regularly to conduct all deduct expenses for business use of her home for thethe following activities.jewelry business.

Contacting patients, surgeons, and hospitals regard- If Tracy also uses the office for work related to hering scheduling. teaching, she would not meet the exclusive use test for the

jewelry business. As an employee, Tracy must meet the Preparing for treatments and presentations.convenience-of-the-employer test to qualify for the deduc-

Maintaining billing records and patient logs. tion. Because she does not meet this test for her work as ateacher, she cannot claim a deduction for the business use Satisfying continuing medical education require-of her home for either activity.ments.

Reading medical journals and books.Place To Meet Patients, Clients, or

Pauls home office qualifies as his principal place of Customers

business for deducting expenses for its use. He conducts If you meet or deal with patients, clients, or customers inadministrative or management activities for his businessyour home in the normal course of your business, evenas an anesthesiologist there and he has no other fixedthough you also carry on business at another location, youlocation where he conducts administrative or managementcan deduct your expenses for the part of your home usedactivities for this business. His choice to use his homeexclusively and regularly for business if you meet theoffice instead of one provided by the hospital does notfollowing tests.disqualify his home office from being his principal place of

business. His performance of substantial nonadministra- You physically meet with patients, clients, or custom-

tive or nonmanagement activities at fixed locations outsideers on your premises.

his home also does not disqualify his home office from Their use of your home is substantial and integral tobeing his principal place of business. Because he meets all

the conduct of your business.the qualifications, including principal place of business, he

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Doctors, dentists, attorneys, and other professionals Your office is 20% (240 1,200) of the total area ofwho maintain offices in their homes will generally meet this your home.requirement.

Your business percentage is 20%.Using your home for occasional meetings and tele-

phone calls will not qualify you to deduct expenses for theExample 2.business use of your home.

The part of your home you use exclusively and regularly You use one room in your home for business.

to meet patients, clients, or customers does not have to be Your home has four rooms, all of about equal size.your principal place of business.

Your office is 25% (1

4) of the total area of yourExample. June Quill, a self-employed attorney, works 3 home.days a week in her city office. She works 2 days a week in

Your business percentage is 25%.her home office used only for business. She regularlymeets clients there. Her home office qualifies for a busi-ness deduction because she meets clients there in the

Use lines 17 of Form 8829, or lines 13 on thenormal course of her business.

worksheet near the end of this publication, tofigure your business percentage.

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Separate Structure

You can deduct expenses for a separate free-standing Part-Year Usestructure, such as a studio, garage, or barn, if you use itexclusively and regularly for your business. The structure You cannot deduct expenses for the business use of yourdoes not have to be your principal place of business or a home incurred during any part of the year you did not use

place where you meet patients, clients, or customers. your home for business purposes. For example, if youbegin using part of your home for business on July 1, and

Example. John Berry operates a floral shop in town. He you meet all the tests from that date until the end of thegrows the plants for his shop in a greenhouse behind his year, consider only your expenses for the last half of thehome. Since he uses the greenhouse exclusively and year in figuring your allowable deduction.regularly in his business, he can deduct the expenses forits use, subject to the deduction limit, explained later. Deduction Limit

If your gross income from the business use of your homeequals or exceeds your total business expenses (includingFiguring the Deductiondepreciation), you can deduct all your business expenses

After you determine that you meet the tests under Qualify- related to the use of your home. If your gross income froming for a Deduction, you can begin to figure how much you the business use is less than your total business ex-

can deduct. You will need to figure the percentage of your penses, your deduction for certain expenses for the busi-home used for business and the limit on the deduction. ness use of your home is limited.

Your deduction of otherwise nondeductible expenses,such as insurance, utilities, and depreciation (with depreci-Business Percentageation taken last), allocable to the business, is limited to thegross income from the business use of your home minusTo find the business percentage, compare the size of thethe sum of the following.part of your home that you use for business to your whole

house. Use the resulting percentage to figure the business1) The business part of expenses you could deductpart of the expenses for operating your entire home.

even if you did not use your home for business (suchYou can use any reasonable method to determine theas mortgage interest, real estate taxes, and casualtybusiness percentage. The following are two commonlyand theft losses, which are allowable as itemizedused methods for figuring the percentage.deductions on Schedule A (Form 1040)). These ex-

1) Divide the area (length multiplied by the width) used penses are discussed in detail under Deducting Ex-for business by the total area of your home. penses, later.

2) Divide the number of rooms used for business by the 2) The business expenses that relate to the businesstotal number of rooms in your home. You can use activity in the home (for example, business phone,this method if the rooms in your home are all about supplies, and depreciation on equipment), but not tothe same size. the use of the home itself.

If you are self-employed, do not include in (2) above yourExample 1. deduction for half of your self-employment tax.

Your office is 240 square feet (12 feet 20 feet).Carryover of unallowed expenses. If your deductions

Your home is 1,200 square feet. are greater than the current years limit, you can carry over

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the excess to the next year. They are subject to the deduc-tion limit for that year, whether or not you live in the same Deducting Expenseshome during that year.

If you qualify to deduct expenses for the business use ofFiguring the deduction limit and carryover. If you areyour home, you must divide the expenses of operatingan employee or file Schedule F (Form 1040), Profit or Lossyour home between personal and business use. This sec-From Farming, use the worksheet near the end of thistion discusses the types of expenses you may have andpublication to figure your deduction limit and carryover. Ifgives examples and brief explanations of these expenses.you file Schedule C (Form 1040), figure your deduction

limit and carryover on Form 8829.

Types of ExpensesExample. You meet the requirements for deducting ex-The part of a home operating expense you can use topenses for the business use of your home. You use 20% offigure your deduction depends on both of the following.your home for this business. In 2001, your business ex-

penses and the expenses for the business use of your Whether the expense is direct, indirect, or unrelated.

home are deducted from your gross income in the follow- The percentage of your home used for business.ing order.

Gross income from business . . . . . . . . . . . . . . . . . . . . . $6,000 The following table describes the types of expenses youLess:

may have and the extent to which they are deductible.Deductible mortgage interest and real estate taxes (20%) 3,000Business expenses not related to the use of your home(100%) (business phone, supplies, and depreciation on

Expense Description Deductibilityequipment) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000Deduction limit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,000 Direct Expenses only for Deductible in full.*Less other expenses allocable to business use of home:

the business partMaintenance, insurance, and utilities (20%) . . . . . . . . . . 800 of your home.Depreciation allowed (20% = $1,600 allowable) . . . . . . . 200

Other expenses up to the deduction limit . . . . . . . . . . . . . $1,000 Examples: Exception: Depreciation carryover to 2002 ($1,600 $200) (subject Painting or repairs May be only partiallyto deduction limit in 2002) . . . . . . . . . . . . . . . . . . . . . . . $1,400 only in the area deductible in a day-care

used for business. facility. See Day-CareYou can deduct all of the business part of your deducti- Facility, later.

ble mortgage interest and real estate taxes ($3,000). YouIndirect Expenses for Deductible based on thealso can deduct all of your business expenses not related

running your percentage of your hometo the use of your home ($2,000). Additionally, you can entire home. used for business.*deduct all of the business part of your expenses for mainte-

Examples:nance, insurance, and utilities, because the total ($800) isInsurance,

less than the $1,000 deduction limit. Your deduction for utilities, anddepreciation for the business use of your home is limited to general repairs.$200 ($1,000 minus $800) because of the deduction limit.

Unrelated Expenses only for Not deductible.You can carry over the $1,400 balance and add it to your the parts of yourhome notuseddepreciation for 2002, subject to your deduction limit infor business.2002.

Examples:More than one place of business. If part of the grossLawn care or painting

income from your trade or business is from the business a room not useduse of part of your home and part is from a place other than for business.your home, you must determine the part of your gross

*Subject to the deduction limit, discussed earlier.income from the business use of your home before youfigure the deduction limit. In making this determination,

Form 8829 and the deduction worksheet (bothconsider the time you spend at each location, the businessillustrated near the end of this publication) haveinvestment in each location, and any other relevant factsseparate columns for direct and indirect ex-and circumstances.

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penses.If your home office qualifies as your principalplace of business, you can deduct your daily

Expenses related to tax-exempt income. Generally,transportation costs between your home and an-TIP

you cannot deduct expenses that are related to tax-exemptother work location in the same trade or business. Forallowances. However, if you receive a tax-exempt parson-more information on transportation costs, see Publicationage allowance or a tax-exempt military allowance, your463, Travel, Entertainment, Gift and Car Expenses.expenses for mortgage interest and real estate taxes aredeductible under the normal rules. No deduction is allowedfor other expenses related to the tax-exempt allowance.

If your housing is provided free of charge and the valueof the housing is tax-exempt, you cannot deduct the rentalvalue of any portion of the housing.

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entire loss to figure the business use of the homeExamples of Expensesdeduction.

Certain expenses are deductible whether or notyou use 2) Indirect expense. If the loss is on property you useyour home for business. If you qualify to claim business for bothbusiness and personal purposes, use onlyuse of the home expenses, you can use the business the business portion to figure the deduction.percentage of these expenses to figure your total business

3) Unrelated expense. If the loss is on property you douse of the home deduction. These expenses include thenotuse in your business, do not use any of the lossfollowing.to figure the deduction.

Real estate taxes.

If you are filing Schedule C (Form 1040), get Form 8829and follow the instructions for casualty losses. If you are an Deductible mortgage interest.employee, a partner, or you file Schedule F (Form 1040),

Casualty losses. use the worksheet near the end of this publication. You willalso need to get Form 4684, Casualties and Thefts.

Other expenses are deductible only if you use yourFor more information on casualty losses, see Publica-

home for business. You can use the business percentagetion 547, Casualties, Disasters, and Thefts.

of these expenses to figure your total business use of thehome deduction. These expenses generally include (butare not limited to) the following. Insurance

Depreciation (covered under Depreciating Your You can deduct the cost of insurance that covers theHome, later). business part of your home. However, if your insurance

premium gives you coverage for a period that extends past Insurance.

the end of your tax year, you can deduct only the business Rent. percentage of the part of the premium that gives you

coverage for your tax year. You can deduct the business Repairs.

percentage of the part that applies to the following year in Security system. that year.

Utilities and services.

Rent

Real Estate Taxes If you rent the home you occupy and meet the require-ments for business use of the home, you can deduct part ofTo figure the business part of your real estate taxes,the rent you pay. To figure your deduction, multiply yourmultiply the real estate taxes paid by the percentage ofrent payments by the percentage of your home used for

your home used for business.business.

For more information on the deduction for real estate If you own your home, you cannot deduct the fair rentaltaxes, see Publication 530, Tax Information for First-Time value of your home. However, see Depreciating YourHomeowners. Home, later.

Deductible Mortgage Interest Repairs

To figure the business part of your deductible mortgage The cost of repairs that relate to your business, includinginterest, multiply this interest by the percentage of your labor (other than your own labor), is a deductible expense.home used for business. You can include interest on a For example, a furnace repair benefits the entire home. Ifsecond mortgage in this computation. If your total mort- you use 10% of your home for business, you can deductgage debt is more than $1,000,000 or your home equity 10% of the cost of the furnace repair.debt is more than $100,000, your deduction may be lim- Repairs keep your home in good working order over itsited. For more information on what interest is deductible, useful life. Examples of common repairs are patching wallssee Publication 936, Home Mortgage Interest Deduction. and floors, painting, wallpapering, repairing roofs and gut-

ters, and mending leaks. However, repairs are sometimestreated as a permanent improvement. See Permanent

Casualty Lossesimprovementslater under Depreciating Your Home.

If you have a casualty loss on your home that you use forbusiness, treat the casualty loss as a direct expense, an Security Systemindirect expense, or an unrelated expense, depending onthe property affected. If you install a security system that protects all the doors

and windows in your home, you can deduct the business1) Direct expense. If the loss is on the portion of the part of the expenses you incur to maintain and monitor the

property you use onlyin your business, use the system. You can also take a depreciation deduction for the

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part of the cost of the security system relating to the improvements. You must also keep accurate records ofbusiness use of your home. these expenses. These records will help you decide

whether an expense is a deductible or capital (added to thebasis) expense.

Utilities and Services

Example. You buy an older home and fix up two roomsExpenses for utilities and services, such as electricity, gas,

as a beauty salon. You patch the plaster on the ceilingstrash removal, and cleaning services, are primarily per-

and walls, paint, repair the floor, install an outside door,sonal expenses. However, if you use part of your home for

and install new wiring, plumbing, and other equipment.business, you can deduct the business part of these ex-

Normally, the patching, painting, and floor work are repairspenses. Generally, the business percentage for utilities is

and the other expenses are permanent improvements.the same as the percentage of your home used for busi-However, since the work gives your property a new use,

ness.the entire remodeling job is a permanent improvement andits cost is added to the basis of the property. You cannotTelephone. The basic local telephone service charge,deduct any portion of it as a repair expense.including taxes, for the first telephone line into your home

is a nondeductible personal expense. However, charges Adjusting for depreciation deducted in earlier years.for business long-distance phone calls on that line, as well Decrease the basis of your property by the depreciationas the cost of a second line into your home used exclu- you deducted, or could have deducted, on your tax returnssively for business, are deductible business expenses. under the method of depreciation you properly selected. IfYou can deduct these expenses even if the expenses for you took less depreciation than you could have under thethe business use of your home do not qualify for the method you selected, decrease the basis by the amountdeduction. Deduct these charges separately on the appro- you could have taken under that method. If you did not takepriate schedule. Do not include them in your home office a depreciation deduction, decrease the basis by the

deduction. amount you could have deducted.If you deducted more depreciation than you should

have, decrease your basis by the amount you should havededucted, plus the part of the excess deducted that actu-Depreciating Your Homeally decreased your tax liability for any year.

If you own your home and qualify to deduct expenses for its If you deducted the incorrect amount of depreciation,business use, you can claim a deduction for depreciation. see How Do You Correct Depreciation Deductions? inDepreciation is an allowance for the wear and tear on the Publication 946.part of your home used for business. You cannot depreci-

Fair market value defined. The fair market value of yourate the cost or value of the land. You recover its cost whenhome is the price at which the property would changeyou sell or otherwise dispose of the property.hands between a buyer and a seller, neither having to buyBefore you figure your depreciation deduction, you needor sell, and both having reasonable knowledge of all nec-to know the following information.

essary facts. Sales of similar property, on or about the date The month and year you started using your home for you begin using your home for business, may be helpful inbusiness. figuring the propertys fair market value.

The adjusted basis and fair market value of yourhome at the time you began using it for business. Figuring the Depreciation Deduction

for the Current Year The cost of any improvements before and after youbegan using the property for business.

If you began using your home for business before 2001, The percentage of your home used for business. continue to use the same depreciation method you used in

See Business Percentage, earlier. past tax years.If you began using your home for business in 2001,

depreciate the business part as nonresidential real prop-Adjusted basis defined. The adjusted basis of yourerty under the modified accelerated cost recovery systemhome is generally its cost, plus the cost of any permanent(MACRS). Under MACRS, nonresidential real property isimprovements you made to it, minus any casualty losses ordepreciated using the straight line method over 39 years.depreciation deducted in earlier tax years. For a discussionFor more information on MACRS and other methods ofof adjusted basis, see Publication 551.depreciation, see Publication 946.

Permanent improvements. A permanent improve-To figure the depreciation deduction, you must first

ment increases the value of property, adds to its life, orfigure the part of the cost of your home that can be

gives it a new or different use. Examples of improvementsdepreciated (depreciable basis). The depreciable basis is

are replacing electric wiring or plumbing, adding a new rooffigured by multiplying the percentage of your home used

or addition, paneling, or remodeling.for business by the smaller of the following.

If you make repairs as part of an extensive remodelingor restoration of your home, the entire job is an improve- The adjusted basis of your home (excluding land) onment. You must carefully distinguish between repairs and the date you began using your home for business.

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The fair market value of your home (excluding land) provement by the business-use percentage and depreci-ate the result over the recovery period that would apply toon the date you began using your home for busi-your home if you began using it for business at the sameness.time as the improvement. For improvements made thisyear, the recovery period is 39 years. For the percentageDepreciation table. If 2001 was the first year you usedto use for the first year, see MACRS Percentage Table foryour home for business, you can figure your 2001 depreci-39-Year Nonresidential Real Property, earlier. For moreation for the business part of your home by using theinformation on recovery periods, see Which Recovery Pe-appropriate percentage from the following table.riod Applies?in chapter 3 of Publication 946.

MACRS Percentage Table for

39-Year Nonresidential Real PropertyDay-Care Facility

Month First Used for Business Percentage To Use

1 2.461% If you use space in your home on a regular basis forproviding day care, you may be able to deduct the busi-2 2.247%ness expenses for that part of your home even though you

3 2.033%use the same space for nonbusiness purposes. To qualify

4 1.819% for this exception to the exclusive use rule, you must meetthe following requirements.5 1.605%

6 1.391%1) You must be in the trade or business of providing

7 1.177% day care for children, persons 65 or older, or personswho are physically or mentally unable to care for8 0.963%

themselves.9 0.749%2) You must have applied for, been granted, or be ex-10 0.535%

empt from having a license, certification, registration,11 0.321% or approval as a day-care center or as a family or12 0.107% group day-care home under state law. You do not

meet this requirement if your application was re-Multiply the depreciable basis of the business part of jected or your license or other authorization was re-

your home by the percentage from the table for the first voked.month you use your home for business. See Table A-7ainAppendix A of Publication 946 for the percentages for the Figuring the deduction. If you regularly use part of yourremaining tax years of the recovery period. home for day care, figure what part is used for day care, as

explained earlier under Business Percentage. If you useExample. In May, George Miller began to use one room that part exclusivelyfor day care, deduct all the allocable

in his home exclusively and regularly to meet clients. This expenses, subject to the deduction limit, as explainedroom is 8% of the square footage of his home. He bought earlier.the home in 1992 for $125,000. He determined from his If the use of part of your home as a day-care facility is

regular, but not exclusive, you must figure what part ofproperty tax records that his adjusted basis in the houseavailable time you actually use it for business. A room that(exclusive of land) is $115,000. In May, the house had ais availablefor use throughout each business day and thatfair market value of $165,000. He multiplies his adjustedyou regularly use in your business is considered to be usedbasis (which is less than the fair market value) by 8%. Thefor day care throughout each business day. You do notresult is $9,200, his depreciable basis for the business parthave to keep records to show the specific hours the areaof the house.was used for business. You may use the area occasionallyGeorge files his return based on the calendar year. Mayfor personal reasons. However, a room you use only occa-is the 5th month of his tax year. He multiplies his deprecia-sionally for business does not qualify for the deduction.ble basis of $9,200 by 1.605% (.01605), the percentage

from the table for the 5th month. The result is $147.66, his To find what part of the available time you actuallydepreciation deduction. use your home for business, compare the total

time used for business to the total time that part ofTIP

your home can be used for all purposes. You can compareDepreciating Permanent Improvements

the hours of business use in a week with the number ofhours in a week (168). Or you can compare the hours ofAdd the costs of permanent improvements made beforebusiness use for the year with the number of hours in theyou began using your home for business to the basis ofyear (8,760 in 2001).your property. Depreciate these costs as part of the cost of

the house as explained earlier. The costs of improvementsmade after you begin using your home for business (that Example 1. Mary Lake uses her basement to operate aaffect the business part of your home, such as a new roof) day-care business for children. She figures the businessare depreciated separately. Multiply the cost of the im- percentage of the basement as follows.

Page 10


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Square footage of the basement 1,600 expenses, 34.25% of any direct expenses for the base-= = 50%Square footage of her home 3,200

ment and room are deductible. In addition, 20.55%She uses the basement for day care an average of 12 (34.25% 60%) of her indirect expenses are deductible.hours a day, 5 days a week, for 50 weeks a year. During

Meals. If you provide food for your day-care recipients, dothe other 12 hours a day, the family can use the basement.not include the expense as a cost of using your home forShe figures the percentage of time the basement is avail-business. Claim it as a separate deduction on your Sched-able for use as follows.ule C (Form 1040). You can never deduct the cost of food

Number of hours available for use (12 x 5 x 50) 3,000 consumed by you or your family. You can deduct as a= = 34.25%Total number of hours in the year (24 x 365) 8,760

business expense 100% of the cost of food consumed by

Mary can deduct 34.25% of any directexpenses for the your day-care recipients and generally only 50% of thebasement. However, because her indirectexpenses are cost of food consumed by your employees. However, youfor the entire house she can deduct only 17.13% of the can deduct 100% of the cost of food consumed by yourindirect expenses. She figures the percentage for her indi- employees if its value can be excluded from their wages asrect expenses as follows. a de minimis fringe benefit. For more information on meals

which meet these requirements, see Mealsin PublicationBusiness percentage of the basement . . . . . . . . . . . . . . . 50%

15-B, Employers Tax Guide to Fringe Benefits.Multiplied by: Percentage of time used. . . . . . . . . . . . . . . 34.25%If you deduct the cost of food for your day-care busi-Percentage for indirect expenses . . . . . . . . . . . . . . . . 17.13%

ness, keep a separate record (with receipts) of yourMary completes Form 8829 as shown in Figure B. In

familys food costs.Part I she figures the percentage of her home used for

Reimbursements you receive from a sponsor under thebusiness, including the percentage of time the basement is

Child and Adult Food Care Program of the Department ofused.

Agriculture are taxable only to the extent they exceed yourIn Part II, Mary figures her deductible expenses. She

expenses for food for eligible children. If your reimburse-uses the following information to complete Part II. ments are more than your expenses for food, show thedifference as income in Part I of Schedule C. If your foodGross income from her day-care business . . . . . . . . . . . . $50,000

Expenses not related to the business use of the home . . . . $25,000 expenses are greater than the reimbursements, show theTentative profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,000 difference as an expense in Part V of Schedule C. Do notRent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,400 include payments or expenses for your own children if theyUtilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $850 are eligible for the program. Follow this procedure even ifPainting the basement . . . . . . . . . . . . . . . . . . . . . . . . . $500

you receive a Form 1099 reporting a payment from theMary enters her tentative profit, $25,000, on line 8. (This sponsor.

figure is the same as the amount on line 29 of her ScheduleC.)

The expenses she paid for rent and utilities relate to her Sale or Exchange ofentire home. Therefore, she enters them in column (b) onthe appropriate lines. She adds these two expenses ( l ine

Your Home21) and multiplies the total by the percentage on line 7 andenters the result, $1,585, on line 22. If you sell or exchange your home, you may be able toMary paid $500 to have the basement painted. The exclude up to $250,000 ($500,000 for certain married

painting is a direct expense. However, because she does persons filing a joint return) of the gain on the sale ornot use the basement exclusively for day care, she must exchange if you meet the ownership and use tests.multiply $500 by the percentage of time the basement isused for day care (34.25% line 6). She enters $171 Ownership and use tests. To claim the exclusion, you(34.25% $500) on line 18, column (a). She adds lines 21 must meet the ownership and use tests. This means thatand 22 and enters $1,756 ($171 + $1,585) on line 24. during the 5-year period ending on the date of the sale, youBecause this is less than her deduction limit ( line 15), she met both the following tests.can deduct the entire amount. She completes the rest of

1) You owned the home for at least 2 years (ownershipPart II by entering $1,756 on lines 32 and 34. She thentest).carries the $1,756 to line 30 of her Schedule C (not

shown). 2) You lived in the home as your main home for at least2 years (use test).

Example 2. Assume the same facts as in Example 1except that Mary also has another room that is available Business use during the ownership and use peri-each business day for children to take naps in. Although ods. If you used part of your home for business during theshe did not keep a record of the number of hours the room ownership and use periods, the exclusion generally ap-was actually used for naps, it was used for part of each plies only to the gain attributable to the personal part ofbusiness day. Since the room was available during regular your home.operating hours each business day and was used regularlyin the business, it is considered to be used for day care Depreciation. If you were entitled to take depreciationthroughout each business day. The basement and room deductions because you used your home for business, youare 60% of the total area of her home. In figuring her cannotexclude the part of your gain equal to any depreci-

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Proo

fasof

Octob

er29

,2001

(subject

toch

ange)

Mary Lake 412 00 1234

1,600

3,20050

3,000

3425

17.13

25,000

-0-25,000

1,7561,756

23,244

-0--0-

1,756-0-

1,756

171

171

8508,4009,2501,585

Figure B

Expenses for Business Use of Your Home

Part of Your Home Used for Business

1 Area used regularly and exclusively for business, regularly for day care, or for storage of inventory

or product samples. See instructions

2 Total area of home3 Divide line 1 by line 2. Enter the result as a percentage

For day-care facilities not used exclusively for business, also complete lines 46.

All others, skip lines 46 and enter the amount from line 3 on line 7.

4 Multiply days used for day care during year by hours used per day

5 Total hours available for use during the year (365 days 24 hours). See instructions

6 Divide line 4 by line 5. Enter the result as a decimal amount

7 Business percentage. For day-care facilities not used exclusively for business, multiply line 6 byline 3 (enter the result as a percentage). All others, enter the amount from line 3

Figure Your Allowable Deduction

8 Enter the amount from Schedule C, line 29, plus any net gain or (loss) derived from the business use ofyour home and shown on Schedule D or Form 4797. If more than one place of business, see instructions

9 Casualty losses. See instructions10 Deductible mortgage interest. See instructions

11 Real estate taxes. See instructions

12 Add lines 9, 10, and 11

13 Multiply line 12, column (b) by line 7

14 Add line 12, column (a) and line 13

15 Subtract line 14 from line 8. If zero or less, enter -0-

16 Excess mortgage interest. See instructions

17 Insurance

18 Repairs and maintenance

File only with Schedule C (Form 1040). Use a separate Form 8829 for eachhome you used for business during the year.

See separate instructions.

OMB No. 1545-1266

Department of the TreasuryInternal Revenue Service

AttachmentSequence No. 66

Form 8829

Name(s) of proprietor(s)

(a) Direct expenses (b) Indirect expenses

19 Utilities

20 Other expenses. See instructions

21 Add lines 16 through 20

22 Multiply line 21, column (b) by line 7

23 Carryover of operating expenses from 2000 Form 8829, line 4124 Add line 21 in column (a), line 22, and line 23

25 Allowable operating expenses. Enter the smaller of line 15 or line 24

26 Limit on excess casualty losses and depreciation. Subtract line 25 from line 15

27 Excess casualty losses. See instructions

28 Depreciation of your home from Part III below

29 Carryover of excess casualty losses and depreciation from 2000 Form 8829, line 42

30 Add lines 27 through 29

31 Allowable excess casualty losses and depreciation. Enter the smaller of line 26 or line 30

32 Add lines 14, 25, and 31

33 Casualty loss portion, if any, from lines 14 and 31. Carry amount to Form 4684, Section B

34 Allowable expenses for business use of your home. Subtract line 33 from line 32. Enter hereand on Schedule C, line 30. If your home was used for more than one business, see instructions

35 Enter the smaller of your homes adjusted basis or its fair market value. See instructions

36 Value of land included on line 35

37 Basis of building. Subtract line 36 from line 35

38 Business basis of building. Multiply line 37 by line 7

Depreciation of Your Home

39 Depreciation percentage. See instructions40 Depreciation allowable. Multiply line 38 by line 39. Enter here and on line 28 above. See instructions

41 Operating expenses. Subtract line 25 from line 24. If less than zero, enter -0-42 Excess casualty losses and depreciation. Subtract line 31 from line 30. If less than zero, enter -0-

Carryover of Unallowed Expenses to 2002

For Paperwork Reduction Act Notice, see page 4 of separate instructions. Cat. No. 13232M Form 8829 (2001)

1

23

4

5

6

7

24

25

26

30

31

32

33

34

35

36

37

38

39

40

41

42

27

28

29

22

23

8

9

10

11

12

13

14

15

16

17

18

19

20

21

hr.

8,760 hr.

.

%

Part IV

Part I

Part II

Your social security number

%

%

Part III

See instructions for columns (a) and (b) beforecompleting lines 920.

(99)

2001

Page 12


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ation allowed or allowable as a deduction for periods after depreciate the property using the Alternate DepreciationMay 6, 1997. If you can show by adequate records or other System (ADS) (straight line method). For more informationevidence that the depreciation deduction allowed was less on ADS, see chapter 3 in Publication 946.than the amount allowable, the amount you cannot ex- Listed property meets the more-than-50%-use test forclude is the depreciation allowed. any year if its qualified business use is more than 50% of

its total use. You must allocate the use of any item of listedBasis adjustment. If you used any part of your home for property used for more than one purpose during the yearbusiness, you must adjust the basis of your home for any among its various uses. You cannot use the percentage ofdepreciation that was allowable for its business use, even investment use as part of the percentage of qualified busi-if you did not claim it. If you took less depreciation than you ness use to meet the more-than-50%-use test. However,

could have under the method you properly selected, you you do use the combined total of business and investmentmust decrease the basis by the amount you could have use to figure your depreciation deduction for the property.taken under that method. If you took more depreciationthan you should have under the method you properly Example 1. Sarah does not qualify to claim a deductionselected, you must decrease the basis by the amount you for the business use of her home, but she uses her homeshould have deducted, plus the part of the excess de- computer 40% of the time for a business she operates outducted that actually decreased your tax liability for any of her home. She also uses the computer 50% of the timeyear. For more information on reducing the basis of your to manage her investments. Sarahs home computer isproperty for depreciation, see Publication 551. listed property because it is not used in a qualified office in

her home. Because she does not use the computer moreMore information. This section covers only the basicthan 50% for business, she cannot elect a section 179rules for the sale or exchange of your home. For morededuction. She can use her combined business/invest-information, see Publication 523.ment use (90%) to figure her depreciation deduction using

ADS.

Business Furniture and Example 2. If Sarah uses her computer 60% of the timefor her business and 30% for managing her investments,Equipmenther computer meets the more-than-50%-use test. She canelect a section 179 deduction. She can use her combined

This section discusses the depreciation and section 179business/investment use (90%) to figure her depreciation

deductions you may be entitled to take for furniture anddeduction using the General Depreciation System (GDS).

equipment you use in your home for business or work asan employee. These deductions are available whether or Employee. If you use your own listed property (or listednot you qualify to deduct expenses for the business use of property you rent) in your work as an employee, the prop-your home. erty is business-use property only if you meet the following

This section explains the different rules for each of the requirements.following.

The use is for your employers convenience.1) Listed property. The use is required as a condition of your employ-

ment.2) Property bought for business use.

3) Personal property converted to business use.As a condition of your employment means the use of

the property is necessary for you to properly perform yourwork. Whether the use of the property is required for thisListed Propertypurpose depends on all the facts and circumstances. Youremployer does not have to tell you specifically to use theIf you use certain types of property, called listed property,property. Nor is a statement by your employer to that effectin your home, special rules apply. Listed property includessufficient.any property of a type generally used for entertainment,

recreation, and amusement (including photographic,Years following the year placed in service. If, in a yearphonographic, communication, and video recording equip-

after you place an item of listed property in service, you failment). Listed property also includes computers and related to meet the more-than-50%-use test for that item of prop-equipment unless they are used in a qualifying office inerty, you may be required to do the following.your home. If you use your computer in a qualifying office

in your home, see Property Bought for Business Use, later.1) Figure depreciation, beginning with the year you no

longer use the property more than 50% for business,More-than-50%-use test. If you bought listed propertyusing the straight line method.and placed it in service during the year, you must use it

more than 50% for business (including work as an em- 2) Figure any excess depreciation (include any sectionployee) to claim a section 179 deduction or an accelerated 179 deduction on the property in figuring excess de-depreciation deduction. preciation) and add it to:

If your business use of listed property is 50% or less,you cannot take a section 179 deduction and you must a) Your gross income, and

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b) The adjusted basis of your property. Most business property used in a home office is either5-year or 7-year property under MACRS.

For more information, see Recapture of Excess Depreci- 5-year propertyincludes computers and peripheralationunder Do the Business-Use Limits Apply?in Publi-

equipment, typewriters, calculators, adding ma-cation 946.chines, and copiers.

Reporting and recordkeeping requirements. If you use 7-year propertyincludes office furniture and fixtureslisted property in your business, you must file Form 4562 to such as desks, files, and safes.claim a depreciation or section 179 deduction. Begin withPart V, Section A, of that form. Under MACRS, you generally use the half-year conven-

tion, which allows you to deduct a half year of depreciationYou cannot take any depreciation or section 179in the first year you use the property in your business. Ifdeduction for the use of listed property unless youyou place more than 40% of your depreciable property incan prove your business/investment use with ad-RECORDSservice during the last 3 months of your tax year, you mustequate records or sufficient evidence to support your ownuse the mid-quarter convention instead of the half-yearstatements.convention. See Publication 946 for an exception for 2001.To meet the adequate records requirement, you must

maintain an account book, diary, log, statement of ex- After you have determined the cost of the depreciablepense, trip sheet, or similar record or other documentary property (minus any section 179 deduction taken on theevidence that is sufficient to establish business/investment property) and whether it is 5-year or 7-year property, useuse. For more information on what records to keep, see the table, shown next, to figure your depreciation if theWhat Records Must Be Kept?in chapter 4 of Publication half-year convention applies.946.

MACRS Percentage Table

for 5- and 7-Year PropertyUsing Half-Year ConventionProperty Bought for Business Use

If you bought certain property to use in your business, you Recovery Year 5-Year Property 7-Year Propertycan do any one of the following (subject to the limits 1 20.00% 14.29%discussed later). 2 32.00% 24.49%

3 19.20% 17.49% Elect a section 179 deductionfor the full cost of the 4 11.52% 12.49%

5 11.52% 8.93%property.6 5.76% 8.92%7 8.93% Take part of the cost as a section 179 deduction8 4.46%and depreciatethe balance.

See Publication 946 for a discussion of the mid-quarter Depreciatethe full cost of the property.convention and for complete MACRS percentage tables.

Section 179 Deduction Example. During the year, Donald Kent bought a deskand three chairs for use in his office. His total bill for the

You can claim the section 179 deduction for the cost offurniture was $1,975. His taxable business income for the

depreciable tangible personal property bought for use inyear was $3,000 without any deduction for the office furni-

your trade or business. You can choose how much (sub-ture. Donald can elect to do one of the following.

ject to the limit) of the cost you want to deduct undersection 179 and how much you want to depreciate. You

1) Take a section 179 deduction for the full cost of thecan spread the section 179 deduction over several items of

office furniture.property in any way you choose as long as the total doesnot exceed the maximum allowable. You cannot take a 2) Take part of the cost of the furniture as a section 179section 179 deduction for the basis of the business part of deduction and depreciate the balance.your home.

3) Depreciate the full cost of the office furniture.You elect the section 179 deduction by completing Part

1 of Form 4562. The furniture is 7-year property. If Donald does not takea section 179 deduction, he multiplies $1,975, the cost of

More information. For more information on the section the furniture, by 14.29% (.1429) to get his depreciation179 deduction, see chapter 2 in Publication 946. deduction of $282.23.

Personal Property Converted toDepreciationBusiness Use

Use Part II of Form 4562 to claim your deduction fordepreciation on property placed in service during the year. If you use property in your home office that was usedDo not include any costs deducted in Part I (section 179 previously for personal purposes, you cannot take a sec-deduction). tion 179 deduction for the property. You can depreciate it,

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however. The method of depreciation you use depends on copies of Forms 8829 or the Publication 587 worksheetsas records of depreciation.when you first used the property for personal purposes.

For more information on recordkeeping, see PublicationIf you began using the property for personal purposes583.after 1986 and change it to business use in 2001, depreci-

ate the property under MACRS.

The basis for depreciation of property changed fromWhere To Deductpersonal to business use is the lesser of the following.

1) The adjusted basis of the property on the date of Deduct expenses for the business use of your home onchange. Form 1040. Where you deduct these expenses on the form

depends on whether you are:2) The fair market value of the property on the date ofchange. A self-employed person, or

If you began using the property for personal purposes An employee.after 1980 and before 1987 and change it to business usein 2001, you generally depreciate the property under theaccelerated cost recovery system (ACRS). However, if the Self-Employed Personsdepreciation under ACRS is greater in the first year thanthe depreciation under MACRS, you must depreciate it If you are self-employed and file Schedule C (Form 1040),under MACRS. For information on ACRS, see Publication complete and attach Form 8829 to your return. If you file534, Depreciating Property Placed in Service Before 1987. Schedule F (Form 1040), report your entire deduction for

business use of the home, up to the limit discussed earlierIf you began using the property for personal purposes(line 32 if you used the worksheet), on line 34 of Schedulebefore 1981 and change it to business use in 2001, depre-F. Write Business Use of Home on the dotted line besideciate the property by the straight line or declining balancethe entry.method based on salvage value and useful life.

Deductible mortgage interest. If you file Schedule C(Form 1040), enter all your deductible mortgage interest on

Recordkeeping line 10 of Form 8829. After you have figured the businesspart of the mortgage interest on lines 12 and 13, subtractthat amount from the total mortgage interest on line 10.You do not have to use a particular method ofThe remainder is deductible on Schedule A (Form 1040),recordkeeping, but you must keep records thatlines 10 and 11. If the interest you deduct on Schedule Aprovide the information needed to figure yourRECORDSfor your home mortgage is limited, enter the excess on linedeductions for the business use of your home. You should16 of Form 8829.keep canceled checks, receipts, and other evidence of

If you file Schedule F (Form 1040), include the businessexpenses you paid.

part of your deductible home mortgage interest with yourYour records must show the following information. total business use of the home expenses on line 34. Youcan use the worksheet near the back of this publication to

The part of your home you use for business.figure the deductible part of mortgage interest. Enter the

That you use part of your home exclusively and nonbusiness part of the deductible mortgage interest onregularly for business as either your principal place Schedule A, lines 10 and 11.of business or as the place where you meet or deal To determine if the limits on qualified home mortgagewith clients or customers in the normal course of interest apply to you, see the instructions for Schedule A oryour business. (However, see the earlier discussion, Publication 936.Exceptions to Exclusive Use.)

Real estate taxes. If you file Schedule C (Form 1040), The depreciation and expenses for the business enter all your deductible real estate taxes on line 11 of

part. Form 8829. After you have figured the business part ofyour taxes on lines 12 and 13, subtract that amount fromYou must keep your records for as long as they are impor-your total real estate taxes on line 11. The remainder istant for any tax law. This is usually the later of the followingdeductible on Schedule A, line 6.dates.

If you file Schedule F (Form 1040), include the business1) 3 years from the return due date or the date filed. part of real estate taxes with your total business use of the

home expenses on line 34. Enter the nonbusiness part of2) 2 years from the date the tax was paid.your real estate taxes on line 6 of Schedule A.

Keep records to prove your homes depreciable basis. If you itemize your deductions, be sure to claimThis includes records of when and how you acquired your only the personal part of your deductible mort-home, your original purchase price, any improvements to gage interest and real estate taxes on Schedule ACAUTION

!your home, and any depreciation you are allowed because (Form 1040). Do not deduct any of the business part onyou maintained an office in your home. You can keep Schedule A. For example, if your business percentage on

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line 7 of Form 8829 or line 3 of the worksheet near the back However, you can use the simpler Form 2106-EZ, in-of this publication is 30%, you can claim only 70% of your stead of Form 2106, if you meet the following require-deductible mortgage interest and real estate taxes as per- ments.sonal expenses on Schedule A.

You were not reimbursed for your expenses by youremployer, or if you were reimbursed, the reimburse-

Casualty losses. If you are using Form 8829, refer to the ment was included in box 1 of your Form W-2.specific instructions for lines 9 and 27 and enter the

If you claim car expenses, you use the standardamount from line 33 on line 27 of Form 4684, Section B.mileage rate.Write See Form 8829 above line 27.

If you file Schedule F (Form 1040), enter the businessWhen your employer pays for your expenses using apart of casualty losses (line 31 if you use the worksheet) on

reimbursement or allowance arrangement, the paymentsline 27 of Form 4684, Section B. Write See attached

generally should not be on your Form W-2 if the followingstatement above line 27.

rules for an accountable plan are met.

Other expenses. Report the other home expenses that 1) You adequately account to your employer for thewould not be allowable if you did not use your home for expenses within a reasonable time.business (insurance, maintenance, utilities, depreciation,

2) You return any payments not spent for business ex-etc.) on the appropriate lines of your Form 8829. If you rentpenses (excess reimbursements).rather than own your home, include the rent you paid on

line 20. If these expenses exceed the deduction limit, carry 3) You must have paid or incurred deductible expensesthe excess over to next year. The carryover will be subject while performing services as an employee.to next years deduction limit.

If you meet the accountable plan rules and your busi-If you file Schedule F (Form 1040), include your other-

ness expenses equal your reimbursement, do not reportwise nondeductible expenses (insurance, maintenance,the reimbursement as income and do not deduct the ex-utilities, depreciation, etc.) with your total business use ofpenses.the home expenses on line 34 of Schedule F. If these

expenses exceed the deduction limit, carry the excessAdequately accounting to employer. You adequatelyover to the next year. The carryover will be subject to nextaccount to your employer when you give your employeryears deduction limit.documentary evidence of your travel, mileage, and otheremployee business expenses, such as receipts, along withBusiness expenses not for the use of your home.an account book, diary, or similar record in which youDeduct in full your business expenses that are not for theentered each expense at or near the time you had it.use of your home itself (dues, salaries, supplies, certain

You also may be treated as adequately accounting totelephone expenses, etc.) on the appropriate lines ofyour employer if your employer gives you a per diem or carSchedule C (Form 1040) or Schedule F (Form 1040).allowance similar in form to, and not more than, the federalBecause these expenses are not for the use of your home,rate and you verify the time, place, and business purpose

they are not subject to the deduction limit for business use of each expense. For more information, see the instruc-of the home expenses.tions for Form 2106 and Publication 463, Travel, Entertain-ment, Gift, and Car Expenses.EmployeesRental to employer. If you rent part of your home to your

As an employee, you must itemize deductions on Sched- employer and you use the rented part in performing ser-ule A (Form 1040) to claim expenses for the business use vices for your employer as an employee, your deductionof your home and any other employee business expenses. for the business use of your home is limited. You canThis generally applies to all employees, including outside deduct mortgage interest, real estate taxes, and personalsalespersons. If you are a statutory employee, use Sched- casualty losses for the rented part, subject to any limita-ule C (Form 1040) to claim the expenses. Follow the tions. However, you cannot deduct otherwise allowableinstructions given earlier under Self-Employed Persons. trade or business expenses, business casualty losses, orThe statutory employee box within box 13 on your Form depreciation related to the use of your home in performing

W-2 will be checked if you are a statutory employee. services for your employer.If you have employee expenses for which you were notreimbursed, report them on line 20 of Schedule A. You Deductible mortgage interest. Although you generallygenerally must also complete Form 2106 if either of the can deduct expenses for the business use of your home onfollowing apply. line 20 of Schedule A (Form 1040), do not include any

deductible home mortgage interest on that line. Instead, You claim any travel, transportation, meal, or enter-

deduct both the business and nonbusiness parts of thistainment expenses.

interest on line 10 or 11 of Schedule A. Your employer paid you for any of your job expenses If the home mortgage interest you can deduct on lines

reportable on line 20. (Amounts your employer in- 10 or 11 is limited by the home mortgage interest rules, youcluded in box 1 of your Form W-2 are not considered cannot deduct the excess as an employee business ex-paid by your employer). pense on line 20 of Schedule A, even though you use part

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Expenses not related to business use of the homeof your home for business. To determine if the limits on(100%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 4,500

home mortgage interest apply to you, see the instructionsDeduction limit . . . . . . . . . . . . . . . . . . . . . . . $1,500

for Schedule A or Publication 936.Your deduction for otherwise nondeductible expenses and

Real estate taxes. Deduct both the business and non- depreciation is limited to $1,500. You can deduct all yourbusiness parts of your real estate taxes on line 6 of Sched- otherwise nondeductible expenses ($800) and $700ule A. For more information on amounts allowable as a ($1,500 $800) of your depreciation.deduction for real estate taxes, see Publication 530, Tax You deduct your expenses for business use of yourInformation for First-Time Homeowners. home on Schedule A (Form 1040) as shown in the follow-

ing table.

Casualty losses. Enter the business part of casualtyExpense Amount Schedule Alosses (line 31 of the worksheet) on line 27 of Form 4684,

Section B. Write See attached statement above line 27. Deductible mortgage interest $1,500 Line 10 or 11*

Real estate taxes $1,000 Line 6*Other expenses. If you file Form 2106 or Form 2106-EZ,

Expenses not related to thereport on line 4 the following expenses.business use of the home $2,000 Line 20**

The business part of your otherwise nondeductible Otherwise nondeductible expenses $800 Line 20**expenses (utilities, maintenance, insurance, depreci-

Depreciation $700 Line 20**ation, etc.) that do not exceed the deduction limit.

*In addition to the 80% nonbusiness part of the expense. The employee business expenses not related to the **Subject to the 2%-of-adjusted-gross-income limit.

use of your home, such as advertising.You can carry over the $900 of depreciation that ex-

Add these to your other employee business expenses andceeds the deduction limit to next year, subject to thecomplete the rest of the form. Enter the total from Form deduction limit for that year.

2106, or Form 2106-EZ, on line 20 of Schedule A, where itis subject to the 2%-of-adjusted-gross-income limit. If youdo not have to file Form 2106 or Form 2106-EZ, enter your

Schedule C Exampletotal expenses directly on line 20 of Schedule A.The filled-in forms for John Stephens that follow show howExample. You are an employee who works at home forto report deductions for the business use of your home ifthe convenience of your employer. You meet all the re-you file Schedule C (Form 1040).quirements to deduct expenses for the business use of

your home. Your employer does not reimburse you for anyForm 4562. The following bold line references apply toof your business expenses and you are not otherwiseForm 4562.required to file Form 2106 or Form 2106-EZ.

Part I, lines 113. John began using his home forAs an employee, you do not have gross receipts, cost of

business in January of this year. He purchased a newgoods sold, etc. You begin with gross income from thecomputer and filing cabinet to use in his business. Thebusiness use of your home, which you determine to becomputer, used 100% for business, cost $3,200. The filing$6,000.cabinet cost $600. He elects to take the section 179 deduc-The percentage of expenses due to the business use oftion for both items.your home is 20%. You have the following expenses.

John completes Part I of Form 4562. He enters the costDeductible mortgage interest (20%) . . . . . . . . . . . . . . . . . $1,500 of both the computer and filing cabinet, $3,800, on line 2Real estate taxes (20%) . . . . . . . . . . . . . . . . . . . . . . . . . 1,000

and completes lines 4 and 5. On line 6, he enters aTotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,500description of each item, its cost and the cost he elects to

Expenses not related to business use of the home (100%):expense. He completes the remaining lines in Part I.Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $500

Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,300Part II, line 15c. John converted to business use a deskTelephone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200

and chair he had purchased in 1996 for personal purposes.Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,000

In 1996 he paid $1,500 for them. The fair market value inOtherwise nondeductible expenses: 2001 is $550. Since the fair market value is less than theMaintenance (20%) . . . . . . . . . . . . . . . . . . . . . . . . . . . $200Utilities (20%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350 cost, his depreciable basis is $550.Insurance (20%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250

In Part II, line 15c, column (c), he enters $550 for theTotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $800desk and chair. He completes columns (d) through (f). The

Depreciation (20%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,600furniture is 7-year property under MACRS. He uses theMACRS Percentage Table for 5- and 7-Year PropertyBased on the above expenses, you figure your deduc-Using Half-Year Conventionin this publication or Table A-1tion limit as follows.in Publication 946 to find the rate of 14.29% for property

Gross income . . . . . . . . . . . . . . . . . . . . . . . . . $6,000 placed in service during the first month of the year. HeLess:

multiplies $550 by 14.29% (.1429) and enters $79 in col-Deductible mortgage interest (20%) . . . . . . . . . $1,500Real estate taxes (20%) . . . . . . . . . . . . . . . . . 1,000 umn (g).

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Part II, line 15i. Because this is the first year John used relate to his entire home, he enters them in column (b) onhis home for business, he must figure the depreciation on lines 10 and 11. He then subtracts the $550 business partline 15i. On line 15i, column (c), he enters $11,000, the of these expenses (line 14) from his tentative businessdepreciable basis of the business part of his home. (For a profit (line 8). The result, $25,002 on line 15, is the most hediscussion on how he figures his depreciation deduction, can deduct for his other home office expenses.see Step 3under Form 8829, Part II.)He enters $271 in

Step 2. Next, he figures his deduction for operatingcolumn (g).expenses. He paid $300 to have his office repainted. He

Part IV, line 21. John totals the amounts on line 12 and enters this amount on line 18, column (a) because it is aline 15 in column (g) and enters the total on line 21. He direct expense. All his other expenses ($400 homeowners

enters both the section 179 deduction ($3,800) and the insurance, $1,400 roof repairs, and $1,800 heating anddepreciation on the furniture ($79) on line 13 of Schedule lighting) relate to his entire home. Therefore, he entersC. He enters the depreciation on his home ($271) on Form

them in column (b) on the appropriate lines. He adds the8829, line 28.

$300 direct expenses (line 21) to the $360 total for indirectSchedule C. The following bold line references apply to expenses (line 22) and enters the total, $660, on line 24.Schedule C. Because this amount is less than his deduction limit, he

can deduct it in full. The $24,342 balance of his deductionLine 13. John enters the amount from Form 4562 for hislimit (line 26) is the most he can deduct for depreciation.section 179 deduction ($3,800) and the depreciation de-

duction for his office furniture ($79). Step 3. Next, he figures his allowable depreciation de-duction for the business use of his home in Part III of FormLine 16b. This amount is the interest on installment8829. The adjusted basis of his home is $130,000, which ispayments for the business assets John uses in his homeless than the fair market value of $160,000. He figures theoffice.

value of the land to be $20,000. He subtracts the landLine 25. John had a separate telephone line in his value from the adjusted basis. He multiplies the resulthome office that he used only for business. He can deduct ($110,000) by the percentage on line 7 to get the deprecia-$347 for the line. ble basis of the business part of his home ($11,000).

Lines 28-30. On line 28, he totals all his expenses other Because he began using the office in January of thisthan those for the business use of his home, and then year, he uses the MACRS Percentage Table for 39-Yearsubtracts that total from his gross income. He uses the Nonresidential Real Property in this publication or Tableresult on line 29 to figure the deduction limit on his ex- A-7a in Appendix A of Publication 946. The depreciationpenses for the business use of his home. He enters that percentage for the first year of the recovery period foramount on line 8 of Form 8829 and then completes the assets placed in service in the first month is 2.461%. Hisform. He enters the amount of his home office deduction depreciation deduction for 2001 (line 40) is $271 (.02461 from line 34, Form 8829, on line 30 of Schedule C. $11,000). He enters that amount in Part II on lines 28 and

30. Because it is less than the available balance of hisForm 8829, Part I. John uses one room of his home

deduction limit (line 26), he can deduct the full deprecia-exclusively and regularly to meet clients. In Part I of Form8829 he shows that, based on the square footage, the tion. Since John must also complete Form 4562 for 2001,room is 10% of his home. he enters $271 on line 15i, column (g). See Form 4562,

earlier.Form 8829, Part II. John uses Part II of Form 8829 tofigure his allowable home office deduction. Step 4. Finally, he figures his total deduction for his

home office by adding together his otherwise deductibleStep 1. First, he figures the business part of expensesexpenses (line 14), his operating expenses (line 25), andthat would be deductible even if he did not use part of hisdepreciation (line 31). He enters the result, $1,481, onhome for business. Because these expenses ($4,500 de-lines 32 and 34, and on Schedule C, line 30.ductible mortgage interest and $1,000 real estate taxes)

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John Stephens

Tax Preparation Services

Stephens Tax Service

821 Union StreetHometown, IA 52761

465 00 0001

5 4 1 2 1 3

34,280

34,280

34,280

34,280

253

310

256

347

267

8,728

25,5521,481

24,071

256

512

250

1,266

3,879

750

200

350600

0

0

0

XX

OMB No. 1545-0074SCHEDULE C(Form 1040)

Profit or Loss From Business(Sole Proprietorship)

Partnerships, joint ventures, etc., must file Form 1065 or Form 1065-B.Department of the TreasuryInternal Revenue Service

AttachmentSequence No. 09 Attach to Form 1040 or Form 1041. See Instructions for Schedule C (Form 1040).

Name of proprietor Social security number (SSN)

A Principal business or profession, including product or service (see page C-1 of the instructions) B Enter code from pages C-7 & 8

D Employer ID number (EIN), if anyBusiness name. If no separate business name, leave blank.C

Accounting method:

E

F

Yes NoG

H

Did you materially participate in the operation of this business during 2001? If No, see page C-2 for limit on losses

If you started or acquired this business during 2001, check here

Income

Gross receipts or sales. Caution. If this income was reported to you on Form W-2 and the Statutory

employee box on that form was checked, see page C-2 and check here 1

1

22 Returns and allowances

33 Subtract line 2 from line 1

44 Cost of goods sold (from line 42 on page 2)

5Gross profit. Subtract line 4 from line 35

6Other income, including Federal and state gasoline or fuel tax credit or refund (see page C-3)6

7 Gross income.Add lines 5 and 6 7

Expenses. Enter expenses for business use of your home only on line 30.

8

21Repairs and maintenance21

Advertising8

22Supplies (not included in Part III)22

Bad debts from sales or

services (see page C-3)

9

23

9

Taxes and licenses23

10

Travel, meals, and entertainment:24

Car and truck expenses

(see page C-3)

10

24a

11

Travela

Commissions and fees11

12Depletion12

Meals andentertainment

b

Depreciation and section 179

expense deduction (not included

in Part III) (see page C-3)

13

Enter nondeduct-ible amount in-cluded on line 24b(see page C-5)

c

13

14 Employee benefit programs

(other than on lin

us internal revenue service: p587--2001

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